Treasurys fall as Fed unveils more stimulus

‘Strong’ awards for direct bidders in auction of 10-year notes

LOS ANGELES (MarketWatch) — Treasury prices fell Wednesday, pushing up some yields to levels not seen in a month, after the Federal Reserve unveiled a fresh round of monetary stimulus aimed at keeping the economic recovery on track.

The Federal Reserve outlined a new bond-buying program worth $45 billion per month of longer-term Treasurys. While the size and the composition of the plan were in line with market expectations, the bank unexpectedly set targets for unemployment and inflation, giving the market guidance on when it will eventually raise interest rates. See MarketWatch’s streaming coverage of the Fed decision.

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”For the first time by giving an unemployment-rate target, he has now very clearly stated that easy-money policy is not going to last forever, and I think you’re seeing the bond market react accordingly,” he said. “It’s the stark realization for bond bulls that the party won’t last forever.”

Yields on 10-year Treasury notes
US:10_YEAR
rose to 1.70%, and reached 1.71% during the session. The yield hasn’t pushed above 1.7% since Nov. 6, according to FactSet data.

The 10-year yield was at 1.65% ahead of the Fed’s announcement. Also before the Fed’s announcement, the Treasury Department sold $21 billion of 10-year securities.

Thirty-year
US:30_YEAR
bond yields rose to 2.91% from 2.84%. That yield hadn’t reached above 2.9% since early last month. Yields on the 5-year note
US:5_YEAR
edged up to 0.65%.

“The long end of the Treasury yield curve is getting hit the most in response to the [Fed] news,” wrote Peter Boockvar, an equity strategist at Miller Tabak, in a note to clients.

“Putting aside the possibility of sell on the news or inflation worries, it may very well be just in response to the maturity makeup of QE4 relative to what the plan was when they extended [Operation Twist] in July,” he said.

The Fed’s new purchases of Treasurys are aimed at keeping the total pace of asset purchases at $85 billion a month. If it hadn’t taken action, the Fed purchases would have been reduced at year-end when its existing Operation Twist program to swap short-term debt for longer-term Treasurys is set to expire.

The buying pace will be kept at $45 billion “initially,” suggesting policy makers may review the size of the purchases. The central bank also kept its existing program to buy $40 billion a month in mortgage-backed securities.

In an unexpected move, the Fed said it would hold rates close to zero while the unemployment rate is above 6.5%, as long as inflation doesn’t rise above 2.5%. The Fed had previously said it expected to hold rates low until mid-2015.

Destination Wealth’s Yoshikami said the Fed’s move to set new thresholds “is exactly what the market needs to hear. Businesses are looking for more certainty around what interest-rate policy will be, and any time you can remove uncertainty, it creates an opportunity for decision-making by businesses.”

The market also heard Fed Chairman Bernanke at a press conference Wednesday warn that the Fed can’t shield the economy if it hits the so-called fiscal cliff of tax increases and spending cuts set to go into effect on Jan.1. Lawmakers in Washington need to work out a deal to avert the fiscal cliff.

“If there is no cliff agreement, people will flee risk assets and that will push short yields down as people fly into safety,” said Yoshikami. “If there is a fiscal-cliff deal, risk will be on; it’s that simple.”

On Wednesday, the U.S. sold $21 billion in 10-year notes at a yield of 1.652%. The auction was a reopening, meaning the debt sold carries the same maturity date and coupon as the original securities, in this case sold in November. Bidders offered to buy 2.95 times the amount of debt sold, compared with the recent average of 3.20.

Indirect bidders, a group which includes foreign central banks, bought 24.2% of the sale. Direct bidders, a group which includes domestic money managers, purchased another 42.7%, a “very strong direct award,” as the result was above the recent average of 25%, said CRT Capital Group in a report after the auction. The Treasury sold $32 billion in 3-year notes on Tuesday and will hold an auction of 30-year bonds on Thursday.

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